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Federal Open Market Committee Says Rate Hike Miles Off

Thursday, October 30, 2014 6:35 AM

The Federal Open Market Committee announced yesterday that it will not purchase bonds next month for the first time in more than three years. The Federal Reserve's monetary policy-making body believes that the economy has strengthened enough that it no longer needs that accommodative policy tool, which has injected more than $1.6 trillion into the lending market since the practice began.

"The committee continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability," the Fed said in its statement. "Accordingly, the committee decided to conclude its asset purchase program this month."

"Information received since the Federal Open Market Committee met in September suggests that economic activity is expanding at a moderate pace," the statement said. "Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing. Household spending is rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Inflation has continued to run below the Committee's longer-run objective. Market-based measures of inflation compensation have declined somewhat; survey-based measures of longer-term inflation expectations have remained stable.

However, the FOMC still contends that it will wait a "considerable time" before raising short-term interest rates.

The Fed has kept interest rates pinned near 0 percent in recent years to lower the cost of lending nationwide. "It likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset-purchase program this month," the FOMC said, "especially if projected inflation continues to run below the committee's 2 percent longer run goal, and provided that longer-term inflation expectations remain well anchored."

Even after inflation rises to the levels that the FOMC would like to see, the Fed said it anticipates it will have to hold rates below levels it deems normal in the longer run for some time.